Tuesday, May 24, 2005
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California Cannot New Enforce Arbitration Standards In Cases Involving Securities Industry, S.C. Rules
By a MetNews Staff Writer
California’s new standards for neutral arbitrators cannot be applied to securities industry arbitrations, which must follow rules established by the National Association of Securities Dealers and the Securities and Exchange Commission, the state Supreme Court ruled yesterday.
In a unanimous decision, the justices agreed with the SEC, the NASD, and the New York Stock Exchange that a broker cannot be forced to apply the state’s new rules to a dispute with a disgruntled investor who claims that more than $1 million was withdrawn from his account without authorization.
The high court, however, agreed with the Judicial Council, which wrote the new rules, that the council acted within the scope of its legislative mandate by including dispute resolution provider organizations within the rules’ coverage.
The high court’s ruling is consistent with a Ninth U.S. Circuit Court of Appeals decision handed down earlier this year.
The two members of the high court who serve on the Judicial Council—which submitted an amicus brief limited to the one issue—did not participate in yesterday’s decision. Chief Justice Ronald M. George and Justice Marvin Baxter were replaced by Court of Appeal Justices Steven Vartabedian of the Fifth District and James Ward of the Fourth District’s Div. Two.
The Ethics Standards for Neutral Arbitrators in Contractual Arbitration, as they are officially known, took effect July 1, 2002. They were adopted by the council in compliance with SB 475, a 2001 bill authored by Sen. Martha Escutia, D-Los Angeles, Assemblywoman Hannah-Beth Jackson, D-Santa Barbara, and then-Assemblyman Darrell Steinberg, D-Sacramento.
The standards, set forth as an appendix to the California Rules of Court, include new requirements that potential arbitrators disclose facts that might tend to indicate a conflict of interest, such as whether the person has arbitrated another matter involving a party or attorney involved in the new proceeding in the previous five years. The new rules also broaden the previous grounds for disqualification of an arbitrator.
The case ruled on yesterday involved a former customer of JB Oxford & Company who claimed the firm allowed funds to be improperly withdrawn from his account.
Jack Jevne sued the firm in Los Angeles Superior Court, but the firm moved to compel NASD arbitration pursuant to a standard industry agreement the investor had signed. The motion was granted in February 2001, and an arbitration panel was appointed in the summer of that year.
The firm demurred to Jevne’s claims, and a hearing was eventually scheduled for October 2002. Just prior to the hearing date, however, the NASD stopped appointing arbitrators in California as a result of the adoption of the ethics standards.
The NASD told Jevne it would not proceed with his arbitration unless he waived the ethics standards or agreed to have the arbitration conducted in another state.
Lower court rulings that Jevne would have to arbitrate according to the NASD rules rather than the California standards were correct, Justice Joyce L. Kennard wrote yesterday.
The California standards conflict with the NASD rules, and with the intent of the Securities and Exchange Act of 1934, by allowing courts, and not just the NASD, to disqualify arbitrators and by requiring broader disclosure of personal and professional information by potential arbitrators, Kennard said.
The justice agreed with the SEC that requiring compliance with the California rules would make NASD arbitrations more expensive, discourage potential arbitrators from serving, and make the process less uniform and consistent by imposing different rules in one state.
Jevne’s attorney, Eric Woosley, told The Associated Press he may ask the U.S. Supreme Court to overturn the ruling. “This further undermines public confidence in securities arbitrations,” Woosley said.
Linda Fienberg, president of dispute resolution at NASD, told the AP the ruling provides for “fair, uniform and consistent arbitration services throughout the country.”
Arguing in the state Supreme Court, besides Woosley, were Deputy Attorney General Amy J. Winn for Attorney General Bill Lockyer, amicus in support of the plaintiff; Cliff A. Palefsky of San Francisco for the California Employment Lawyers Association and Trial Lawyers for Public Justice, also as amicus in support of the plaintiff; Jeffrey S. Kob of San Diego for JB Oxford; and Mark A. Perry of Washington, D.C. for the NASD.
David S. Ettinger and Mitchell C. Tilner of Encino’s Horvitz & Levy authored the Judicial Council’s amicus brief.
The case is Jevne v. Superior Court (JB Oxford Holdings, Inc.), 05 S.O.S. 2409.
Copyright 2005, Metropolitan News Company